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Printable 1040ez Federal Tax Form

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Printable 1040ez federal tax form Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Printable 1040ez federal tax form Adjustment for premium. Printable 1040ez federal tax form Adjustment for acquisition premium. Printable 1040ez federal tax form Adjustment for market discount. Printable 1040ez federal tax form Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Printable 1040ez federal tax form “Original issue discount” is defined first. Printable 1040ez federal tax form The other terms are listed alphabetically. Printable 1040ez federal tax form Original issue discount (OID). Printable 1040ez federal tax form   OID is a form of interest. Printable 1040ez federal tax form It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Printable 1040ez federal tax form Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Printable 1040ez federal tax form Accrual period. Printable 1040ez federal tax form   An accrual period is an interval of time used to measure OID. Printable 1040ez federal tax form The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Printable 1040ez federal tax form Acquisition premium. Printable 1040ez federal tax form   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Printable 1040ez federal tax form A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Printable 1040ez federal tax form See Premium, later. Printable 1040ez federal tax form Adjusted issue price. Printable 1040ez federal tax form   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Printable 1040ez federal tax form In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Printable 1040ez federal tax form The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Printable 1040ez federal tax form Debt instrument. Printable 1040ez federal tax form   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Printable 1040ez federal tax form It generally does not include an annuity contract. Printable 1040ez federal tax form Issue price. Printable 1040ez federal tax form   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Printable 1040ez federal tax form Market discount. Printable 1040ez federal tax form   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Printable 1040ez federal tax form An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Printable 1040ez federal tax form The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Printable 1040ez federal tax form Premium. Printable 1040ez federal tax form   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Printable 1040ez federal tax form The premium is the excess of the adjusted basis over the payable amounts. Printable 1040ez federal tax form See Publication 550 for information on the tax treatment of bond premium. Printable 1040ez federal tax form Qualified stated interest. Printable 1040ez federal tax form   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Printable 1040ez federal tax form Stated redemption price at maturity. Printable 1040ez federal tax form   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Printable 1040ez federal tax form Yield to maturity (YTM). Printable 1040ez federal tax form   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Printable 1040ez federal tax form The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Printable 1040ez federal tax form If you do not have this information, consult your broker, tax advisor, or the issuer. Printable 1040ez federal tax form Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Printable 1040ez federal tax form If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Printable 1040ez federal tax form The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Printable 1040ez federal tax form For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Printable 1040ez federal tax form The following discussions explain what information is contained in each section of the list. Printable 1040ez federal tax form Section I. Printable 1040ez federal tax form   This section contains publicly offered, long-term debt instruments. Printable 1040ez federal tax form Section I-A: Corporate Debt Instruments Issued Before 1985. Printable 1040ez federal tax form Section I-B: Corporate Debt Instruments Issued After 1984. Printable 1040ez federal tax form Section I-C: Inflation-Indexed Debt Instruments. Printable 1040ez federal tax form For each publicly offered debt instrument in Section I, the list contains the following information. Printable 1040ez federal tax form The name of the issuer. Printable 1040ez federal tax form The Committee on Uniform Security Identification Procedures (CUSIP) number. Printable 1040ez federal tax form The issue date. Printable 1040ez federal tax form The maturity date. Printable 1040ez federal tax form The issue price expressed as a percent of principal or of stated redemption price at maturity. Printable 1040ez federal tax form The annual stated or coupon interest rate. Printable 1040ez federal tax form (This rate is shown as 0. Printable 1040ez federal tax form 00 if no annual interest payments are provided. Printable 1040ez federal tax form ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Printable 1040ez federal tax form The total OID accrued up to January 1 of a calendar year. Printable 1040ez federal tax form (This information is not available for every instrument. Printable 1040ez federal tax form ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Printable 1040ez federal tax form The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Printable 1040ez federal tax form Section II. Printable 1040ez federal tax form   This section contains stripped coupons and principal components of U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury and Government-Sponsored Enterprise debt instruments. Printable 1040ez federal tax form These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Printable 1040ez federal tax form This section also includes debt instruments backed by U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury securities that represent ownership interests in those securities. Printable 1040ez federal tax form   The obligations listed in Section II are arranged by maturity date. Printable 1040ez federal tax form The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Printable 1040ez federal tax form Section III. Printable 1040ez federal tax form   This section contains short-term discount obligations. Printable 1040ez federal tax form Section III-A: Short-Term U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury Bills. Printable 1040ez federal tax form Section III-B: Federal Home Loan Banks. Printable 1040ez federal tax form Section III-C: Federal National Mortgage Association. Printable 1040ez federal tax form Section III-D: Federal Farm Credit Banks. Printable 1040ez federal tax form Section III-E: Federal Home Loan Mortgage Corporation. Printable 1040ez federal tax form Section III-F: Federal Agricultural Mortgage Corporation. Printable 1040ez federal tax form    Information that supplements Section III-A is available on the Internet at http://www. Printable 1040ez federal tax form treasurydirect. Printable 1040ez federal tax form gov/tdhome. Printable 1040ez federal tax form htm. Printable 1040ez federal tax form   The short-term obligations listed in this section are arranged by maturity date. Printable 1040ez federal tax form For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Printable 1040ez federal tax form Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Printable 1040ez federal tax form Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Printable 1040ez federal tax form U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form savings bonds. Printable 1040ez federal tax form Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Printable 1040ez federal tax form Obligations issued by tax-exempt organizations. Printable 1040ez federal tax form OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Printable 1040ez federal tax form Mortgage-backed securities and mortgage participation certificates. Printable 1040ez federal tax form Long-term OID debt instruments issued before May 28, 1969. Printable 1040ez federal tax form Short-term obligations, other than the obligations listed in Section III. Printable 1040ez federal tax form Debt instruments issued at a discount by states or their political subdivisions. Printable 1040ez federal tax form REMIC regular interests and CDOs. Printable 1040ez federal tax form Commercial paper and banker's acceptances issued at a discount. Printable 1040ez federal tax form Obligations issued at a discount by individuals. Printable 1040ez federal tax form Foreign obligations not traded in the United States and obligations not issued in the United States. Printable 1040ez federal tax form Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Printable 1040ez federal tax form In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Printable 1040ez federal tax form You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Printable 1040ez federal tax form See Backup Withholding, later. Printable 1040ez federal tax form If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Printable 1040ez federal tax form File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Printable 1040ez federal tax form Electronic payee statements. Printable 1040ez federal tax form   You can issue Form 1099-OID electronically with the consent of the recipient. Printable 1040ez federal tax form More information. Printable 1040ez federal tax form   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Printable 1040ez federal tax form Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Printable 1040ez federal tax form To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Printable 1040ez federal tax form If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Printable 1040ez federal tax form Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Printable 1040ez federal tax form If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Printable 1040ez federal tax form A special rule is used to determine the original issue price for information reporting on U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury bills (T-bills) listed in Section III-A. Printable 1040ez federal tax form Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Printable 1040ez federal tax form This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Printable 1040ez federal tax form A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Printable 1040ez federal tax form Example 1. Printable 1040ez federal tax form There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Printable 1040ez federal tax form The price actually paid by the owner cannot be established by owner or middleman records. Printable 1040ez federal tax form You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Printable 1040ez federal tax form The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Printable 1040ez federal tax form Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Printable 1040ez federal tax form For this purpose, you can rely on Section I of the OID list to determine the following information. Printable 1040ez federal tax form Whether a debt instrument has OID. Printable 1040ez federal tax form The OID to be reported on the Form 1099-OID. Printable 1040ez federal tax form In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Printable 1040ez federal tax form You also can report OID on other long-term debt instruments. Printable 1040ez federal tax form Form 1099-OID. Printable 1040ez federal tax form   On Form 1099-OID for a calendar year show the following information. Printable 1040ez federal tax form Box 1. Printable 1040ez federal tax form The OID for the actual dates the owner held the debt instruments during a calendar year. Printable 1040ez federal tax form To determine this amount, see Figuring OID, next. Printable 1040ez federal tax form Box 2. Printable 1040ez federal tax form The qualified stated interest paid or credited during the calendar year. Printable 1040ez federal tax form Interest reported here is not reported on Form 1099-INT. Printable 1040ez federal tax form The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Printable 1040ez federal tax form Box 3. Printable 1040ez federal tax form Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Printable 1040ez federal tax form Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Printable 1040ez federal tax form Box 4. Printable 1040ez federal tax form Any backup withholding for this debt instrument. Printable 1040ez federal tax form Box 7. Printable 1040ez federal tax form The CUSIP number, if any. Printable 1040ez federal tax form If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Printable 1040ez federal tax form 50 2006). Printable 1040ez federal tax form If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Printable 1040ez federal tax form Box 8. Printable 1040ez federal tax form The OID on a U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury obligation for the part of the year the owner held the debt instrument. Printable 1040ez federal tax form Box 9. Printable 1040ez federal tax form Investment expenses passed on to holders of a single-class REMIC. Printable 1040ez federal tax form Boxes 10-12. Printable 1040ez federal tax form Use to report any state income tax withheld for this debt instrument. Printable 1040ez federal tax form Figuring OID. Printable 1040ez federal tax form   You can determine the OID on a long-term debt instrument by using either of the following. Printable 1040ez federal tax form Section I of the OID list. Printable 1040ez federal tax form The income tax regulations. Printable 1040ez federal tax form Using Section I. Printable 1040ez federal tax form   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Printable 1040ez federal tax form Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Printable 1040ez federal tax form For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Printable 1040ez federal tax form   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Printable 1040ez federal tax form Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Printable 1040ez federal tax form Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Printable 1040ez federal tax form Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Printable 1040ez federal tax form Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Printable 1040ez federal tax form If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Printable 1040ez federal tax form Report the result on Form 1099-OID in box 1. Printable 1040ez federal tax form Using the income tax regulations. Printable 1040ez federal tax form   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Printable 1040ez federal tax form For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Printable 1040ez federal tax form (If you use Section I-B, the OID is figured using 6-month accrual periods. Printable 1040ez federal tax form )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Printable 1040ez federal tax form Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Printable 1040ez federal tax form You must file an information return showing the reportable interest and OID, if any, on the CD. Printable 1040ez federal tax form These rules apply whether or not you sold the CD to the owner. Printable 1040ez federal tax form Report OID on a CD in the same way as OID on other debt instruments. Printable 1040ez federal tax form See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Printable 1040ez federal tax form Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Printable 1040ez federal tax form However, do not report the interest if either of the following apply. Printable 1040ez federal tax form You hold the bond as a nominee for the true owner. Printable 1040ez federal tax form The payee is a foreign person. Printable 1040ez federal tax form See Payments to foreign person under Backup Withholding, later. Printable 1040ez federal tax form Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Printable 1040ez federal tax form The coupon may have been “stripped” (separated) from the bond and separately purchased. Printable 1040ez federal tax form However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Printable 1040ez federal tax form Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Printable 1040ez federal tax form The backup withholding is deducted at the time a cash payment is made. Printable 1040ez federal tax form See Pub. Printable 1040ez federal tax form 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Printable 1040ez federal tax form Backup withholding generally applies in the following situations. Printable 1040ez federal tax form The payee does not give you a taxpayer identification number (TIN). Printable 1040ez federal tax form The IRS notifies you that the payee gave an incorrect TIN. Printable 1040ez federal tax form The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Printable 1040ez federal tax form For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Printable 1040ez federal tax form However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Printable 1040ez federal tax form Short-term obligations. Printable 1040ez federal tax form   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Printable 1040ez federal tax form However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Printable 1040ez federal tax form   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Printable 1040ez federal tax form However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Printable 1040ez federal tax form If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Printable 1040ez federal tax form Long-term obligations. Printable 1040ez federal tax form   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Printable 1040ez federal tax form The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Printable 1040ez federal tax form The amount to be withheld is limited to the cash paid. Printable 1040ez federal tax form Registered long-term obligations with cash payments. Printable 1040ez federal tax form   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Printable 1040ez federal tax form The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Printable 1040ez federal tax form If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Printable 1040ez federal tax form For any payment, the required withholding is limited to the cash paid. Printable 1040ez federal tax form Payee not the original owner. Printable 1040ez federal tax form   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Printable 1040ez federal tax form The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Printable 1040ez federal tax form Bearer long-term obligations with cash payments. Printable 1040ez federal tax form   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Printable 1040ez federal tax form For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Printable 1040ez federal tax form For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Printable 1040ez federal tax form The required withholding at maturity is limited to the cash paid. Printable 1040ez federal tax form Sales and redemptions. Printable 1040ez federal tax form   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Printable 1040ez federal tax form Backup withholding applies in the following situations. Printable 1040ez federal tax form The payee does not give you a TIN. Printable 1040ez federal tax form The IRS notifies you that the payee gave an incorrect TIN. Printable 1040ez federal tax form For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Printable 1040ez federal tax form Payments outside the United States to U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form person. Printable 1040ez federal tax form   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form trade or business. Printable 1040ez federal tax form Payments to foreign person. Printable 1040ez federal tax form   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Printable 1040ez federal tax form U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form -source amount. Printable 1040ez federal tax form   Backup withholding and information reporting are not required for payments of U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Printable 1040ez federal tax form A U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form resident is not a foreign person. Printable 1040ez federal tax form For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Printable 1040ez federal tax form Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form person. Printable 1040ez federal tax form   For information about the 28% withholding tax that may apply to payments of U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form -source OID or interest to foreign persons, see Publication 515. Printable 1040ez federal tax form Foreign-source amount. Printable 1040ez federal tax form   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Printable 1040ez federal tax form However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Printable 1040ez federal tax form More information. Printable 1040ez federal tax form   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Printable 1040ez federal tax form 6049-5. Printable 1040ez federal tax form Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Printable 1040ez federal tax form It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Printable 1040ez federal tax form It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Printable 1040ez federal tax form However, the information provided does not cover every situation. Printable 1040ez federal tax form More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Printable 1040ez federal tax form Including OID in income. Printable 1040ez federal tax form   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Printable 1040ez federal tax form Exceptions. Printable 1040ez federal tax form   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Printable 1040ez federal tax form U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form savings bonds. Printable 1040ez federal tax form Tax-exempt obligations. Printable 1040ez federal tax form (However, see Tax-Exempt Bonds and Coupons, later. Printable 1040ez federal tax form ) Obligations issued by individuals before March 2, 1984. Printable 1040ez federal tax form Loans of $10,000 or less between individuals who are not in the business of lending money. Printable 1040ez federal tax form (The dollar limit includes outstanding prior loans by the lender to the borrower. Printable 1040ez federal tax form ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Printable 1040ez federal tax form   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Printable 1040ez federal tax form Publication 550 also discusses rules for holders of REMIC interests and CDOs. Printable 1040ez federal tax form De minimis rule. Printable 1040ez federal tax form   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Printable 1040ez federal tax form 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Printable 1040ez federal tax form Debt instruments with de minimis OID are not listed in this publication. Printable 1040ez federal tax form There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Printable 1040ez federal tax form Also, the de minimis rules generally do not apply to tax-exempt obligations. Printable 1040ez federal tax form Example 2. Printable 1040ez federal tax form You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Printable 1040ez federal tax form One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Printable 1040ez federal tax form Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Printable 1040ez federal tax form Example 3. Printable 1040ez federal tax form Assume the same facts as Example 2, except the debt instrument was issued at $950. Printable 1040ez federal tax form You must report part of the $50 OID each year because it is more than $25. Printable 1040ez federal tax form Choice to report all interest as OID. Printable 1040ez federal tax form   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Printable 1040ez federal tax form See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Printable 1040ez federal tax form   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Printable 1040ez federal tax form For more information, see Regulations section 1. Printable 1040ez federal tax form 1272-3. Printable 1040ez federal tax form Purchase after date of original issue. Printable 1040ez federal tax form   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Printable 1040ez federal tax form If so, the OID reported to you on Form 1099-OID may have to be adjusted. Printable 1040ez federal tax form For more information, see Showing an OID adjustment under How To Report OID, later. Printable 1040ez federal tax form The following rules generally do not apply to contingent payment debt instruments. Printable 1040ez federal tax form Adjustment for premium. Printable 1040ez federal tax form   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Printable 1040ez federal tax form Your adjustment is the total OID shown on your Form 1099-OID. Printable 1040ez federal tax form Adjustment for acquisition premium. Printable 1040ez federal tax form   If your debt instrument has acquisition premium, reduce the OID you report. Printable 1040ez federal tax form Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Printable 1040ez federal tax form Adjustment for market discount. Printable 1040ez federal tax form   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Printable 1040ez federal tax form Your adjustment is the accrued market discount for the year. Printable 1040ez federal tax form See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Printable 1040ez federal tax form If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Printable 1040ez federal tax form The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Printable 1040ez federal tax form For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Printable 1040ez federal tax form 1275-7. Printable 1040ez federal tax form Sale, exchange, or redemption. Printable 1040ez federal tax form   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Printable 1040ez federal tax form If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Printable 1040ez federal tax form Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Printable 1040ez federal tax form   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Printable 1040ez federal tax form Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Printable 1040ez federal tax form In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Printable 1040ez federal tax form   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Printable 1040ez federal tax form Example 4. Printable 1040ez federal tax form Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Printable 1040ez federal tax form 00 on November 1 of Year 1. Printable 1040ez federal tax form The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Printable 1040ez federal tax form The debt instrument provides for semiannual payments of interest at 10%. Printable 1040ez federal tax form Assume the debt instrument is a capital asset in Larry's hands. Printable 1040ez federal tax form The debt instrument has $13,765. Printable 1040ez federal tax form 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Printable 1040ez federal tax form 00 issue price). Printable 1040ez federal tax form Larry sold the debt instrument for $90,000 on November 1 of Year 4. Printable 1040ez federal tax form Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Printable 1040ez federal tax form 00 of OID in income and has increased his basis by that amount to $90,791. Printable 1040ez federal tax form 00. Printable 1040ez federal tax form Larry has realized a loss of $791. Printable 1040ez federal tax form 00. Printable 1040ez federal tax form All of Larry's loss is capital loss. Printable 1040ez federal tax form Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Printable 1040ez federal tax form Form 1099-OID shows all OID income in box 1 except OID on a U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury obligation, which is shown in box 8. Printable 1040ez federal tax form It also shows, in box 2, any qualified stated interest you must include in income. Printable 1040ez federal tax form (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Printable 1040ez federal tax form ) A copy of Form 1099-OID will be sent to the IRS. Printable 1040ez federal tax form Do not attach your copy to your tax return. Printable 1040ez federal tax form Keep it for your records. Printable 1040ez federal tax form If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Printable 1040ez federal tax form A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Printable 1040ez federal tax form Form 1099-OID not received. Printable 1040ez federal tax form   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Printable 1040ez federal tax form Refiguring OID. Printable 1040ez federal tax form   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Printable 1040ez federal tax form You bought the debt instrument at a premium or at an acquisition premium. Printable 1040ez federal tax form The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury securities). Printable 1040ez federal tax form The debt instrument is a contingent payment or inflation-indexed debt instrument. Printable 1040ez federal tax form See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Printable 1040ez federal tax form Refiguring interest. Printable 1040ez federal tax form   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Printable 1040ez federal tax form Nominee. Printable 1040ez federal tax form   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Printable 1040ez federal tax form ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Printable 1040ez federal tax form Show the owner of the debt instrument as the “recipient” and you as the “payer. Printable 1040ez federal tax form ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Printable 1040ez federal tax form You must also give a copy of the Form 1099-OID to the actual owner. Printable 1040ez federal tax form However, you are not required to file a nominee return to show amounts belonging to your spouse. Printable 1040ez federal tax form See the Form 1099 instructions for more information. Printable 1040ez federal tax form   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Printable 1040ez federal tax form How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Printable 1040ez federal tax form Form 1040 or Form 1040A required. Printable 1040ez federal tax form   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Printable 1040ez federal tax form You received a Form 1099-OID as a nominee for the actual owner. Printable 1040ez federal tax form Your total interest and OID income for the year was more than $1,500. Printable 1040ez federal tax form Form 1040 required. Printable 1040ez federal tax form   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Printable 1040ez federal tax form For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Printable 1040ez federal tax form Also, you must use Form 1040 if you were charged an early withdrawal penalty. Printable 1040ez federal tax form Where to report. Printable 1040ez federal tax form   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Printable 1040ez federal tax form Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Printable 1040ez federal tax form Also include any other OID and interest income for which you did not receive a Form 1099. Printable 1040ez federal tax form Showing an OID adjustment. Printable 1040ez federal tax form   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Printable 1040ez federal tax form   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Printable 1040ez federal tax form If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Printable 1040ez federal tax form Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Printable 1040ez federal tax form Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Printable 1040ez federal tax form Subtract that OID from the subtotal and enter the result on line 2. Printable 1040ez federal tax form If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Printable 1040ez federal tax form Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Printable 1040ez federal tax form Below the subtotal, write “OID Adjustment” and show the additional OID. Printable 1040ez federal tax form Add that OID to the subtotal and enter the result on line 2. Printable 1040ez federal tax form Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Printable 1040ez federal tax form It also may depend on the type of the debt instrument. Printable 1040ez federal tax form There are different rules for each of the following debt instruments. Printable 1040ez federal tax form Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Printable 1040ez federal tax form Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Printable 1040ez federal tax form Debt instruments issued after July 1, 1982, and before 1985. Printable 1040ez federal tax form Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Printable 1040ez federal tax form Contingent payment debt instruments issued after August 12, 1996. Printable 1040ez federal tax form Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Printable 1040ez federal tax form Zero coupon bonds. Printable 1040ez federal tax form   The rules for figuring OID on zero coupon bonds backed by U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Printable 1040ez federal tax form Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Printable 1040ez federal tax form The OID, which is taxed as ordinary income, generally equals the following amount. Printable 1040ez federal tax form   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Printable 1040ez federal tax form If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Printable 1040ez federal tax form Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Printable 1040ez federal tax form For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Printable 1040ez federal tax form Your basis in the debt instrument is increased by the OID you include in income. Printable 1040ez federal tax form Form 1099-OID. Printable 1040ez federal tax form   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Printable 1040ez federal tax form However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Printable 1040ez federal tax form See Reduction for acquisition premium, later. Printable 1040ez federal tax form If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Printable 1040ez federal tax form irs. Printable 1040ez federal tax form gov/pub1212 by clicking the link under Recent Developments. Printable 1040ez federal tax form Form 1099-OID not received. Printable 1040ez federal tax form    The OID listed is for each $1,000 of redemption price. Printable 1040ez federal tax form You must adjust the listed amount if your debt instrument has a different principal amount. Printable 1040ez federal tax form For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Printable 1040ez federal tax form   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Printable 1040ez federal tax form (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Printable 1040ez federal tax form ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Printable 1040ez federal tax form Divide the OID shown by 12. Printable 1040ez federal tax form Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Printable 1040ez federal tax form This is the OID to include in income unless you paid an acquisition premium. Printable 1040ez federal tax form The reduction for acquisition premium is discussed next. Printable 1040ez federal tax form Reduction for acquisition premium. Printable 1040ez federal tax form   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Printable 1040ez federal tax form Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Printable 1040ez federal tax form This is the monthly OID. Printable 1040ez federal tax form Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Printable 1040ez federal tax form (If the result is zero or less, stop here. Printable 1040ez federal tax form You did not pay an acquisition premium. Printable 1040ez federal tax form ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Printable 1040ez federal tax form Subtract the amount figured in (3) from the amount figured in (1). Printable 1040ez federal tax form This is the OID to include in income for each month you hold the debt instrument during the year. Printable 1040ez federal tax form Transfers during the month. Printable 1040ez federal tax form   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Printable 1040ez federal tax form Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Printable 1040ez federal tax form Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Printable 1040ez federal tax form For information about showing the correct OID on your tax return, see How To Report OID, earlier. Printable 1040ez federal tax form Form 1099-OID. Printable 1040ez federal tax form   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Printable 1040ez federal tax form However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Printable 1040ez federal tax form See Constant yield method and the discussions on acquisition premium that follow, later. Printable 1040ez federal tax form If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Printable 1040ez federal tax form irs. Printable 1040ez federal tax form gov/pub1212 by clicking the link under Recent Developments. Printable 1040ez federal tax form Form 1099-OID not received. Printable 1040ez federal tax form    The OID listed is for each $1,000 of redemption price. Printable 1040ez federal tax form You must adjust the listed amount if your debt instrument has a different principal amount. Printable 1040ez federal tax form For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Printable 1040ez federal tax form   If you held the debt instrument the entire year, use the OID shown in Section I-A. Printable 1040ez federal tax form (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Printable 1040ez federal tax form ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Printable 1040ez federal tax form Method 1. Printable 1040ez federal tax form    Divide the total OID for a calendar year by 365 (366 for leap years). Printable 1040ez federal tax form Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Printable 1040ez federal tax form  This computation is an approximation and may result in a slightly higher OID than Method 2. Printable 1040ez federal tax form Method 2. Printable 1040ez federal tax form    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Printable 1040ez federal tax form (See Accrual period under Constant yield method, next. Printable 1040ez federal tax form ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Printable 1040ez federal tax form If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Printable 1040ez federal tax form Add the results of (2) and (3). Printable 1040ez federal tax form This is the OID to include in income, unless you paid an acquisition premium. Printable 1040ez federal tax form (The reduction for acquisition premium is discussed later. Printable 1040ez federal tax form ) Constant yield method. Printable 1040ez federal tax form   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Printable 1040ez federal tax form OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Printable 1040ez federal tax form   Figure the OID allocable to any accrual period as follows. Printable 1040ez federal tax form Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Printable 1040ez federal tax form Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Printable 1040ez federal tax form Accrual period. Printable 1040ez federal tax form   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Printable 1040ez federal tax form Your tax year will usually include parts of two accrual periods. Printable 1040ez federal tax form Daily OID. Printable 1040ez federal tax form   The OID for any accrual period is allocated equally to each day in the accrual period. Printable 1040ez federal tax form You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Printable 1040ez federal tax form If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Printable 1040ez federal tax form Figuring daily OID. Printable 1040ez federal tax form   The daily OID for the initial accrual period is figured using the following formula. Printable 1040ez federal tax form   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Printable 1040ez federal tax form Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Printable 1040ez federal tax form   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Printable 1040ez federal tax form Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Printable 1040ez federal tax form Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Printable 1040ez federal tax form   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Printable 1040ez federal tax form However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Printable 1040ez federal tax form To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Printable 1040ez federal tax form The numerator is the acquisition premium. Printable 1040ez federal tax form The denominator is the total OID remaining for the debt instrument after your purchase date. Printable 1040ez federal tax form Section I-A is available at www. Printable 1040ez federal tax form irs. Printable 1040ez federal tax form gov/pub1212 and clicking the link under Recent Developments. Printable 1040ez federal tax form Using Section I-A to figure accumulated OID. Printable 1040ez federal tax form   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Printable 1040ez federal tax form The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Printable 1040ez federal tax form The OID from January 1 of a calendar year to the date of purchase, figured as follows. Printable 1040ez federal tax form Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Printable 1040ez federal tax form Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Printable 1040ez federal tax form Add the amounts figured in (2a) and (2b). Printable 1040ez federal tax form Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Printable 1040ez federal tax form You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Printable 1040ez federal tax form Your basis in the debt instrument is increased by the OID you include in income. Printable 1040ez federal tax form For information about showing the correct OID on your tax return, see How To Report OID, earlier. Printable 1040ez federal tax form Form 1099-OID. Printable 1040ez federal tax form   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Printable 1040ez federal tax form However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Printable 1040ez federal tax form See Constant yield method and Reduction for acquisition premium, later. Printable 1040ez federal tax form   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Printable 1040ez federal tax form See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Printable 1040ez federal tax form If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Printable 1040ez federal tax form irs. Printable 1040ez federal tax form gov/pub1212 by clicking the link under Recent Developments. Printable 1040ez federal tax form Form 1099-OID not received. Printable 1040ez federal tax form   The OID listed is for each $1,000 of redemption price. Printable 1040ez federal tax form You must adjust the listed amount if your debt instrument has a different principal amount. Printable 1040ez federal tax form For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Printable 1040ez federal tax form   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Printable 1040ez federal tax form (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Printable 1040ez federal tax form ) If you did not hold the debt instrument the entire year, figure your OID as follows. Printable 1040ez federal tax form Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Printable 1040ez federal tax form (See Accrual period under Constant yield method, later. Printable 1040ez federal tax form ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Printable 1040ez federal tax form Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Printable 1040ez federal tax form Add the results of (2) and (3). Printable 1040ez federal tax form This is the OID to include in income for that year, unless you paid an acquisition premium. Printable 1040ez federal tax form (The reduction for acquisition premium is discussed later. Printable 1040ez federal tax form ) Tax-exempt bond. Printable 1040ez federal tax form   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Printable 1040ez federal tax form You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Printable 1040ez federal tax form In general, use the rules that follow to determine your OID. Printable 1040ez federal tax form Constant yield method. Printable 1040ez federal tax form   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Printable 1040ez federal tax form (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Printable 1040ez federal tax form ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Printable 1040ez federal tax form   Figure the OID allocable to any accrual period as follows. Printable 1040ez federal tax form Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Printable 1040ez federal tax form The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Printable 1040ez federal tax form The yield must be stated appropriately taking into account the length of the particular accrual period. Printable 1040ez federal tax form Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Printable 1040ez federal tax form Accrual period. Printable 1040ez federal tax form   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Printable 1040ez federal tax form For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Printable 1040ez federal tax form Any short period is included as the first accrual period. Printable 1040ez federal tax form   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Printable 1040ez federal tax form However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Printable 1040ez federal tax form Daily OID. Printable 1040ez federal tax form   The OID for any accrual period is allocated equally to each day in the accrual period. Printable 1040ez federal tax form Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Printable 1040ez federal tax form Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Printable 1040ez federal tax form If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Printable 1040ez federal tax form Figuring daily OID. Printable 1040ez federal tax form   The daily OID for the initial accrual period is figured using the following formula. Printable 1040ez federal tax form   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Printable 1040ez federal tax form Example 5. Printable 1040ez federal tax form On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Printable 1040ez federal tax form 17. Printable 1040ez federal tax form According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Printable 1040ez federal tax form The yield to maturity is 12%, compounded semiannually. Printable 1040ez federal tax form The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Printable 1040ez federal tax form The accrual periods are the 6-month periods ending on each of these dates. Printable 1040ez federal tax form The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Printable 1040ez federal tax form The daily OID for the first accrual period is figured as follows. Printable 1040ez federal tax form   ($86,235. Printable 1040ez federal tax form 17 x . Printable 1040ez federal tax form 12/2) – $5,000     181 days     = $174. Printable 1040ez federal tax form 11020 = $. Printable 1040ez federal tax form 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Printable 1040ez federal tax form 17 + $174. Printable 1040ez federal tax form 11), or $86,409. Printable 1040ez federal tax form 28. Printable 1040ez federal tax form The number of days for the second accrual period (July 1 through December 31) is 184 days. Printable 1040ez federal tax form The daily OID for the second accrual period is figured as follows. Printable 1040ez federal tax form   ($86,409. Printable 1040ez federal tax form 28 x . Printable 1040ez federal tax form 12/2) – $5,000     184 days     = $184. Printable 1040ez federal tax form 55681 = $1. Printable 1040ez federal tax form 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Printable 1040ez federal tax form 11 ($. Printable 1040ez federal tax form 95665 × 182 days) plus $184. Printable 1040ez federal tax form 56 ($1. Printable 1040ez federal tax form 00303 × 184 days), or $358. Printable 1040ez federal tax form 67. Printable 1040ez federal tax form Add the OID to the $10,000 interest you report on your income tax return for Year 1. Printable 1040ez federal tax form Example 6. Printable 1040ez federal tax form Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Printable 1040ez federal tax form Also, the interest payment dates are October 31 and April 30 of each calendar year. Printable 1040ez federal tax form The accrual periods are the 6-month periods ending on each of these dates. Printable 1040ez federal tax form The number of days for the first accrual period (May 1 through October 31) is 184 days. Printable 1040ez federal tax form The daily OID for the first accrual period is figured as follows. Printable 1040ez federal tax form   ($86,235. Printable 1040ez federal tax form 17 x . Printable 1040ez federal tax form 12/2) – $5,000     184 days     = $174. Printable 1040ez federal tax form 11020 = $. Printable 1040ez federal tax form 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Printable 1040ez federal tax form The daily OID for the second accrual period is figured as follows. Printable 1040ez federal tax form   ($86,409. Printable 1040ez federal tax form 28 x . Printable 1040ez federal tax form 12/2) – $5,000     181 days     = $184. Printable 1040ez federal tax form 55681 = $1. Printable 1040ez federal tax form 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Printable 1040ez federal tax form 31 of OID in income. Printable 1040ez federal tax form This is $174. Printable 1040ez federal tax form 11 ($. Printable 1040ez federal tax form 94625 × 184 days) for the period May 1 through October 31 plus $62. Printable 1040ez federal tax form 20 ($1. Printable 1040ez federal tax form 01965 × 61 days) for the period November 1 through December 31. Printable 1040ez federal tax form The OID is added to the $5,000 interest income paid on October 31 of Year 1. Printable 1040ez federal tax form Your basis in the debt instrument is increased by the OID you include in income. Printable 1040ez federal tax form On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Printable 1040ez federal tax form 48 ($86,235. Printable 1040ez federal tax form 17 + $236. Printable 1040ez federal tax form 31). Printable 1040ez federal tax form Short first accrual period. Printable 1040ez federal tax form   You may have to make adjustments if a debt instrument has a short first accrual period. Printable 1040ez federal tax form For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Printable 1040ez federal tax form (The remaining accrual periods begin on May 1 and November 1. Printable 1040ez federal tax form ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Printable 1040ez federal tax form You may use any reasonable compounding method in determining OID for a short period. Printable 1040ez federal tax form Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Printable 1040ez federal tax form Consult your tax advisor for more information about making this computation. Printable 1040ez federal tax form   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Printable 1040ez federal tax form Reduction for acquisition premium. Printable 1040ez federal tax form   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Printable 1040ez federal tax form To figure the daily acquisition premium, multiply the daily OID by the following fraction. Printable 1040ez federal tax form The numerator is the acquisition premium. Printable 1040ez federal tax form The denominator is the total OID remaining for the debt instrument after your purchase date. Printable 1040ez federal tax form Example 7. Printable 1040ez federal tax form Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Printable 1040ez federal tax form The adjusted issue price on November 1 of Year 1 is $86,409. Printable 1040ez federal tax form 28 ($86,235. Printable 1040ez federal tax form 17 + $174. Printable 1040ez federal tax form 11). Printable 1040ez federal tax form In this case, you paid an acquisition premium of $590. Printable 1040ez federal tax form 72 ($87,000 − $86,409. Printable 1040ez federal tax form 28). Printable 1040ez federal tax form The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Printable 1040ez federal tax form 1) Daily OID on date of purchase (2nd accrual period) $1. Printable 1040ez federal tax form 01965*  2)  Acquisition premium $590. Printable 1040ez federal tax form 72    3)  Total OID remaining after purchase date ($13,764. Printable 1040ez federal tax form 83 − $174. Printable 1040ez federal tax form 11) 13,590. Printable 1040ez federal tax form 72   4) Line 2 ÷ line 3 . Printable 1040ez federal tax form 04346  5)  Line 1 × line 4 . Printable 1040ez federal tax form 04432  6)  Daily OID reduced for the acquisition premium. Printable 1040ez federal tax form Line 1 − line 5 $0. Printable 1040ez federal tax form 97533  * As shown in Example 6. Printable 1040ez federal tax form The total OID to include in income for Year 1 is $59. Printable 1040ez federal tax form 50 ($. Printable 1040ez federal tax form 97533 × 61 days). Printable 1040ez federal tax form Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Printable 1040ez federal tax form In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Printable 1040ez federal tax form If you hold a contingent payment bond, you must report OID as it accrues each year. Printable 1040ez federal tax form Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Printable 1040ez federal tax form To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Printable 1040ez federal tax form Noncontingent bond method. Printable 1040ez federal tax form    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Printable 1040ez federal tax form In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Printable 1040ez federal tax form When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Printable 1040ez federal tax form If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Printable 1040ez federal tax form If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Printable 1040ez federal tax form Form 1099-OID. Printable 1040ez federal tax form   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Printable 1040ez federal tax form For example, the amount may not be correct if the contingent payment was different from the projected amount. Printable 1040ez federal tax form If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Printable 1040ez federal tax form For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Printable 1040ez federal tax form Figuring OID. Printable 1040ez federal tax form   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Printable 1040ez federal tax form The issuer must make these available to you. Printable 1040ez federal tax form Comparable yield. Printable 1040ez federal tax form   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Printable 1040ez federal tax form The comparable yield is determined as of the debt instrument's issue date. Printable 1040ez federal tax form Projected payment schedule. Printable 1040ez federal tax form   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Printable 1040ez federal tax form The projected payment schedule is created by the issuer as of the debt instrument's issue date. Printable 1040ez federal tax form It is used to determine the issuer's and holder's interest accruals and adjustments. Printable 1040ez federal tax form Steps for figuring OID. Printable 1040ez federal tax form   Figure the OID on a contingent payment debt instrument in two steps. Printable 1040ez federal tax form Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Printable 1040ez federal tax form Use the comparable yield as the yield to maturity. Printable 1040ez federal tax form In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Printable 1040ez federal tax form Do not treat any amount payable as qualified stated interest. Printable 1040ez federal tax form Adjust the OID in (1) to account for actual contingent payments. Printable 1040ez federal tax form If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Printable 1040ez federal tax form If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Printable 1040ez federal tax form Net positive adjustment. Printable 1040ez federal tax form   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Printable 1040ez federal tax form Treat a net positive adjustment as additional OID for the tax year. Printable 1040ez federal tax form Net negative adjustment. Printable 1040ez federal tax form   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Printable 1040ez federal tax form Use a net negative adjustment to offset OID on the debt instrument for the tax year. Printable 1040ez federal tax form If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Printable 1040ez federal tax form However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Printable 1040ez federal tax form You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Printable 1040ez federal tax form Basis adjustments. Printable 1040ez federal tax form   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Printable 1040ez federal tax form Your basis, however, is not affected by any negative or positive adjustments. Printable 1040ez federal tax form Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Printable 1040ez federal tax form Treatment of gain or loss on sale or exchange. Printable 1040ez federal tax form   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Printable 1040ez federal tax form If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Printable 1040ez federal tax form If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Printable 1040ez federal tax form See Regulations section 1. Printable 1040ez federal tax form 1275-4 for exceptions to these rules. Printable 1040ez federal tax form Premium, acquisition premium, and market discount. Printable 1040ez federal tax form   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Printable 1040ez federal tax form See Regulations section 1. Printable 1040ez federal tax form 1275-4 to determine how to account for these items. Printable 1040ez federal tax form Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Printable 1040ez federal tax form An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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The Printable 1040ez Federal Tax Form

Printable 1040ez federal tax form Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Printable 1040ez federal tax form General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Printable 1040ez federal tax form Several assets. Printable 1040ez federal tax form Special situations. Printable 1040ez federal tax form Schedule D (Form 1040). Printable 1040ez federal tax form Form 4797. Printable 1040ez federal tax form How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Printable 1040ez federal tax form The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Printable 1040ez federal tax form The installment sales method cannot be used for the following. Printable 1040ez federal tax form Sale of inventory. Printable 1040ez federal tax form   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Printable 1040ez federal tax form See Sale of a Business under Other Rules, later. Printable 1040ez federal tax form Dealer sales. Printable 1040ez federal tax form   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Printable 1040ez federal tax form This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Printable 1040ez federal tax form However, the rule does not apply to an installment sale of property used or produced in farming. Printable 1040ez federal tax form Special rule. Printable 1040ez federal tax form   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Printable 1040ez federal tax form For more information, see section 453(l). Printable 1040ez federal tax form Stock or securities. Printable 1040ez federal tax form   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Printable 1040ez federal tax form You must report the entire gain on the sale in the year in which the trade date falls. Printable 1040ez federal tax form Installment obligation. Printable 1040ez federal tax form   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Printable 1040ez federal tax form General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Printable 1040ez federal tax form See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Printable 1040ez federal tax form Sale at a loss. Printable 1040ez federal tax form   If your sale results in a loss, you cannot use the installment method. Printable 1040ez federal tax form If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Printable 1040ez federal tax form Unstated interest. Printable 1040ez federal tax form   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Printable 1040ez federal tax form See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Printable 1040ez federal tax form Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Printable 1040ez federal tax form Each payment on an installment sale usually consists of the following three parts. Printable 1040ez federal tax form Interest income. Printable 1040ez federal tax form Return of your adjusted basis in the property. Printable 1040ez federal tax form Gain on the sale. Printable 1040ez federal tax form In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Printable 1040ez federal tax form You do not include in income the part that is the return of your basis in the property. Printable 1040ez federal tax form Basis is the amount of your investment in the property for installment sale purposes. Printable 1040ez federal tax form Interest Income You must report interest as ordinary income. Printable 1040ez federal tax form Interest is generally not included in a down payment. Printable 1040ez federal tax form However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Printable 1040ez federal tax form Interest provided in the agreement is called stated interest. Printable 1040ez federal tax form If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Printable 1040ez federal tax form See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Printable 1040ez federal tax form Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Printable 1040ez federal tax form A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Printable 1040ez federal tax form Figuring adjusted basis for installment sale purposes. Printable 1040ez federal tax form   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Printable 1040ez federal tax form When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Printable 1040ez federal tax form Worksheet A. Printable 1040ez federal tax form Figuring Adjusted Basis and Gross Profit Percentage 1. Printable 1040ez federal tax form Enter the selling price for the property   2. Printable 1040ez federal tax form Enter your adjusted basis for the property     3. Printable 1040ez federal tax form Enter your selling expenses     4. Printable 1040ez federal tax form Enter any depreciation recapture     5. Printable 1040ez federal tax form Add lines 2, 3, and 4. Printable 1040ez federal tax form  This is your adjusted basis for installment sale purposes   6. Printable 1040ez federal tax form Subtract line 5 from line 1. Printable 1040ez federal tax form If zero or less, enter -0-. Printable 1040ez federal tax form  This is your gross profit     If the amount entered on line 6 is zero, stop here. Printable 1040ez federal tax form You cannot use the installment method. Printable 1040ez federal tax form   7. Printable 1040ez federal tax form Enter the contract price for the property   8. Printable 1040ez federal tax form Divide line 6 by line 7. Printable 1040ez federal tax form This is your gross profit percentage   Selling price. Printable 1040ez federal tax form   The selling price is the total cost of the property to the buyer and includes any of the following. Printable 1040ez federal tax form Any money you are to receive. Printable 1040ez federal tax form The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Printable 1040ez federal tax form Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Printable 1040ez federal tax form Any of your selling expenses the buyer pays. Printable 1040ez federal tax form   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Printable 1040ez federal tax form Adjusted basis for installment sale purposes. Printable 1040ez federal tax form   Your adjusted basis is the total of the following three items. Printable 1040ez federal tax form Adjusted basis. Printable 1040ez federal tax form Selling expenses. Printable 1040ez federal tax form Depreciation recapture. Printable 1040ez federal tax form Adjusted basis. Printable 1040ez federal tax form   Basis is your investment in the property for installment sale purposes. Printable 1040ez federal tax form The way you figure basis depends on how you acquire the property. Printable 1040ez federal tax form The basis of property you buy is generally its cost. Printable 1040ez federal tax form The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Printable 1040ez federal tax form   While you own property, various events may change your original basis. Printable 1040ez federal tax form Some events, such as adding rooms or making permanent improvements, increase basis. Printable 1040ez federal tax form Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Printable 1040ez federal tax form The result is adjusted basis. Printable 1040ez federal tax form   For more information on how to figure basis and adjusted basis, see Publication 551. Printable 1040ez federal tax form For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Printable 1040ez federal tax form Selling expenses. Printable 1040ez federal tax form   Selling expenses relate to the sale of the property. Printable 1040ez federal tax form They include commissions, attorney fees, and any other expenses paid on the sale. Printable 1040ez federal tax form Selling expenses are added to the basis of the sold property. Printable 1040ez federal tax form Depreciation recapture. Printable 1040ez federal tax form   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Printable 1040ez federal tax form See Depreciation Recapture Income under Other Rules, later. Printable 1040ez federal tax form Gross profit. Printable 1040ez federal tax form   Gross profit is the total gain you report on the installment method. Printable 1040ez federal tax form   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Printable 1040ez federal tax form If the property you sold was your home, subtract from the gross profit any gain you can exclude. Printable 1040ez federal tax form See Sale of Your Home , later, under Reporting Installment Sale Income. Printable 1040ez federal tax form Contract price. Printable 1040ez federal tax form   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Printable 1040ez federal tax form Gross profit percentage. Printable 1040ez federal tax form   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Printable 1040ez federal tax form This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Printable 1040ez federal tax form   The gross profit percentage generally remains the same for each payment you receive. Printable 1040ez federal tax form However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sell property at a contract price of $6,000 and your gross profit is $1,500. Printable 1040ez federal tax form Your gross profit percentage is 25% ($1,500 ÷ $6,000). Printable 1040ez federal tax form After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Printable 1040ez federal tax form The remainder (balance) of each payment is the tax-free return of your adjusted basis. Printable 1040ez federal tax form Amount to report as installment sale income. Printable 1040ez federal tax form   Multiply the payments you receive each year (less interest) by the gross profit percentage. Printable 1040ez federal tax form The result is your installment sale income for the tax year. Printable 1040ez federal tax form In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Printable 1040ez federal tax form A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Printable 1040ez federal tax form For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Printable 1040ez federal tax form Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Printable 1040ez federal tax form You then must refigure the gross profit percentage for the remaining payments. Printable 1040ez federal tax form Refigure your gross profit using Worksheet B. Printable 1040ez federal tax form You will spread any remaining gain over future installments. Printable 1040ez federal tax form Worksheet B. Printable 1040ez federal tax form New Gross Profit Percentage — Selling Price Reduced 1. Printable 1040ez federal tax form Enter the reduced selling  price for the property   2. Printable 1040ez federal tax form Enter your adjusted  basis for the  property     3. Printable 1040ez federal tax form Enter your selling  expenses     4. Printable 1040ez federal tax form Enter any depreciation  recapture     5. Printable 1040ez federal tax form Add lines 2, 3, and 4. Printable 1040ez federal tax form   6. Printable 1040ez federal tax form Subtract line 5 from line 1. Printable 1040ez federal tax form  This is your adjusted  gross profit   7. Printable 1040ez federal tax form Enter any installment sale  income reported in  prior year(s)   8. Printable 1040ez federal tax form Subtract line 7 from line 6   9. Printable 1040ez federal tax form Future installments   10. Printable 1040ez federal tax form Divide line 8 by line 9. Printable 1040ez federal tax form  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form In 2011, you sold land with a basis of $40,000 for $100,000. Printable 1040ez federal tax form Your gross profit was $60,000. Printable 1040ez federal tax form You received a $20,000 down payment and the buyer's note for $80,000. Printable 1040ez federal tax form The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Printable 1040ez federal tax form Your gross profit percentage is 60%. Printable 1040ez federal tax form You reported a gain of $12,000 on each payment received in 2011 and 2012. Printable 1040ez federal tax form In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Printable 1040ez federal tax form The new gross profit percentage, 46. Printable 1040ez federal tax form 67%, is figured on Example—Worksheet B. Printable 1040ez federal tax form You will report a gain of $7,000 (46. Printable 1040ez federal tax form 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Printable 1040ez federal tax form Example — Worksheet B. Printable 1040ez federal tax form New Gross Profit Percentage — Selling Price Reduced 1. Printable 1040ez federal tax form Enter the reduced selling  price for the property 85,000 2. Printable 1040ez federal tax form Enter your adjusted  basis for the  property 40,000   3. Printable 1040ez federal tax form Enter your selling  expenses -0-   4. Printable 1040ez federal tax form Enter any depreciation  recapture -0-   5. Printable 1040ez federal tax form Add lines 2, 3, and 4. Printable 1040ez federal tax form 40,000 6. Printable 1040ez federal tax form Subtract line 5 from line 1. Printable 1040ez federal tax form  This is your adjusted  gross profit 45,000 7. Printable 1040ez federal tax form Enter any installment sale  income reported in  prior year(s) 24,000 8. Printable 1040ez federal tax form Subtract line 7 from line 6 21,000 9. Printable 1040ez federal tax form Future installments 45,000 10. Printable 1040ez federal tax form Divide line 8 by line 9. Printable 1040ez federal tax form  This is your new gross profit percentage* 46. Printable 1040ez federal tax form 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Printable 1040ez federal tax form Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Printable 1040ez federal tax form You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Printable 1040ez federal tax form See Schedule D (Form 1040) and Form 4797 , later. Printable 1040ez federal tax form If the property was your main home, you may be able to exclude part or all of the gain. Printable 1040ez federal tax form See Sale of Your Home , later. Printable 1040ez federal tax form Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Printable 1040ez federal tax form Attach it to your tax return for each year. Printable 1040ez federal tax form Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Printable 1040ez federal tax form Which parts to complete. Printable 1040ez federal tax form   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Printable 1040ez federal tax form Year of sale. Printable 1040ez federal tax form   Complete lines 1 through 4, Part I, and Part II. Printable 1040ez federal tax form If you sold property to a related party during the year, also complete Part III. Printable 1040ez federal tax form Later years. Printable 1040ez federal tax form   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Printable 1040ez federal tax form   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Printable 1040ez federal tax form (After December 31, 1986, the installment method is not available for the sale of marketable securities. Printable 1040ez federal tax form ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Printable 1040ez federal tax form Complete Part III unless you received the final payment during the tax year. Printable 1040ez federal tax form   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Printable 1040ez federal tax form Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Printable 1040ez federal tax form Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Printable 1040ez federal tax form Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Printable 1040ez federal tax form If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Printable 1040ez federal tax form Your gain is long-term if you owned the property for more than 1 year when you sold it. Printable 1040ez federal tax form Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Printable 1040ez federal tax form All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Printable 1040ez federal tax form For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Printable 1040ez federal tax form If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Printable 1040ez federal tax form ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Printable 1040ez federal tax form See Publication 523 for information about excluding the gain. Printable 1040ez federal tax form If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Printable 1040ez federal tax form Seller-financed mortgage. Printable 1040ez federal tax form   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Printable 1040ez federal tax form   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Printable 1040ez federal tax form   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Printable 1040ez federal tax form   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Printable 1040ez federal tax form Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Printable 1040ez federal tax form The following topics are discussed. Printable 1040ez federal tax form Electing out of the installment method. Printable 1040ez federal tax form Payments received or considered received. Printable 1040ez federal tax form Escrow account. Printable 1040ez federal tax form Depreciation recapture income. Printable 1040ez federal tax form Sale to a related person. Printable 1040ez federal tax form Like-kind exchange. Printable 1040ez federal tax form Contingent payment sale. Printable 1040ez federal tax form Single sale of several assets. Printable 1040ez federal tax form Sale of a business. Printable 1040ez federal tax form Unstated interest and original issue discount. Printable 1040ez federal tax form Disposition of an installment obligation. Printable 1040ez federal tax form Repossession. Printable 1040ez federal tax form Interest on deferred tax. Printable 1040ez federal tax form Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Printable 1040ez federal tax form To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Printable 1040ez federal tax form Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Printable 1040ez federal tax form You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Printable 1040ez federal tax form If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sold a parcel of land for $50,000. Printable 1040ez federal tax form You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Printable 1040ez federal tax form The buyer gave you a note for $40,000. Printable 1040ez federal tax form The note had an FMV of $40,000. Printable 1040ez federal tax form You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Printable 1040ez federal tax form The land cost $25,000, and you owned it for more than one year. Printable 1040ez federal tax form You decide to elect out of the installment method and report the entire gain in the year of sale. Printable 1040ez federal tax form Gain realized:     Selling price $50,000 Minus: Property's adj. Printable 1040ez federal tax form basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Printable 1040ez federal tax form basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Printable 1040ez federal tax form You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Printable 1040ez federal tax form The interest on the note is ordinary income and is reported as interest income each year. Printable 1040ez federal tax form How to elect out. Printable 1040ez federal tax form   To make this election, do not report your sale on Form 6252. Printable 1040ez federal tax form Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Printable 1040ez federal tax form When to elect out. Printable 1040ez federal tax form   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Printable 1040ez federal tax form Automatic six-month extension. Printable 1040ez federal tax form   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Printable 1040ez federal tax form Write “Filed pursuant to section 301. Printable 1040ez federal tax form 9100-2” at the top of the amended return and file it where the original return was filed. Printable 1040ez federal tax form Revoking the election. Printable 1040ez federal tax form   Once made, the election can be revoked only with IRS approval. Printable 1040ez federal tax form A revocation is retroactive. Printable 1040ez federal tax form You will not be allowed to revoke the election if either of the following applies. Printable 1040ez federal tax form One of the purposes is to avoid federal income tax. Printable 1040ez federal tax form The tax year in which any payment was received has closed. Printable 1040ez federal tax form Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Printable 1040ez federal tax form In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Printable 1040ez federal tax form These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Printable 1040ez federal tax form However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Printable 1040ez federal tax form Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Printable 1040ez federal tax form Include these expenses in the selling and contract prices when figuring the gross profit percentage. Printable 1040ez federal tax form Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Printable 1040ez federal tax form Mortgage not more than basis. Printable 1040ez federal tax form   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Printable 1040ez federal tax form It is considered a recovery of your basis. Printable 1040ez federal tax form The contract price is the selling price minus the mortgage. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sell property with an adjusted basis of $19,000. Printable 1040ez federal tax form You have selling expenses of $1,000. Printable 1040ez federal tax form The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Printable 1040ez federal tax form The selling price is $25,000 ($15,000 + $10,000). Printable 1040ez federal tax form Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Printable 1040ez federal tax form The contract price is $10,000 ($25,000 − $15,000 mortgage). Printable 1040ez federal tax form Your gross profit percentage is 50% ($5,000 ÷ $10,000). Printable 1040ez federal tax form You report half of each $2,000 payment received as gain from the sale. Printable 1040ez federal tax form You also report all interest you receive as ordinary income. Printable 1040ez federal tax form Mortgage more than basis. Printable 1040ez federal tax form   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Printable 1040ez federal tax form The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Printable 1040ez federal tax form   To figure the contract price, subtract the mortgage from the selling price. Printable 1040ez federal tax form This is the total amount (other than interest) you will receive directly from the buyer. Printable 1040ez federal tax form Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Printable 1040ez federal tax form The contract price is then the same as your gross profit from the sale. Printable 1040ez federal tax form    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form The selling price for your property is $9,000. Printable 1040ez federal tax form The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Printable 1040ez federal tax form Your adjusted basis in the property is $4,400. Printable 1040ez federal tax form You have selling expenses of $600, for a total installment sale basis of $5,000. Printable 1040ez federal tax form The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Printable 1040ez federal tax form This amount is included in the contract price and treated as a payment received in the year of sale. Printable 1040ez federal tax form The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Printable 1040ez federal tax form Report 100% of each payment (less interest) as gain from the sale. Printable 1040ez federal tax form Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Printable 1040ez federal tax form Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Printable 1040ez federal tax form You are considered to receive a payment equal to the outstanding canceled debt. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Printable 1040ez federal tax form On April 4, 2013, she bought the land for $70,000. Printable 1040ez federal tax form At that time, $30,000 of her loan to you was outstanding. Printable 1040ez federal tax form She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Printable 1040ez federal tax form She did not assume an existing mortgage. Printable 1040ez federal tax form She canceled the $30,000 debt you owed her. Printable 1040ez federal tax form You are considered to have received a $30,000 payment at the time of the sale. Printable 1040ez federal tax form Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Printable 1040ez federal tax form If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Printable 1040ez federal tax form Compare the debt to your installment sale basis in the property being sold. Printable 1040ez federal tax form If the debt is less than your installment sale basis, none of it is treated as a payment. Printable 1040ez federal tax form If it is more, only the difference is treated as a payment. Printable 1040ez federal tax form If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Printable 1040ez federal tax form These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Printable 1040ez federal tax form However, they apply only to the following types of debt the buyer assumes. Printable 1040ez federal tax form Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Printable 1040ez federal tax form Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Printable 1040ez federal tax form If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Printable 1040ez federal tax form The value of the assumed debt is then considered a payment to you in the year of sale. Printable 1040ez federal tax form Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Printable 1040ez federal tax form However, see Like-Kind Exchange , later. Printable 1040ez federal tax form Generally, the amount of the payment is the property's FMV on the date you receive it. Printable 1040ez federal tax form Exception. Printable 1040ez federal tax form   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Printable 1040ez federal tax form See Unstated Interest and Original Issue Discount (OID) , later. Printable 1040ez federal tax form Debt not payable on demand. Printable 1040ez federal tax form   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Printable 1040ez federal tax form This is true even if the debt is guaranteed by a third party, including a government agency. Printable 1040ez federal tax form Fair market value (FMV). Printable 1040ez federal tax form   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Printable 1040ez federal tax form Third-party note. Printable 1040ez federal tax form   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Printable 1040ez federal tax form Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Printable 1040ez federal tax form The excess of the note's face value over its FMV is interest. Printable 1040ez federal tax form Exclude this interest in determining the selling price of the property. Printable 1040ez federal tax form However, see Exception under Property Used As a Payment, earlier. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sold real estate in an installment sale. Printable 1040ez federal tax form As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Printable 1040ez federal tax form The FMV of the third-party note at the time of the sale was $30,000. Printable 1040ez federal tax form This amount, not $50,000, is a payment to you in the year of sale. Printable 1040ez federal tax form The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Printable 1040ez federal tax form The remaining 40% is interest taxed as ordinary income. Printable 1040ez federal tax form Bond. Printable 1040ez federal tax form   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Printable 1040ez federal tax form For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Printable 1040ez federal tax form    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Printable 1040ez federal tax form However, see Exception under Property Used As a Payment, earlier. Printable 1040ez federal tax form Buyer's note. Printable 1040ez federal tax form   The buyer's note (unless payable on demand) is not considered payment on the sale. Printable 1040ez federal tax form However, its full face value is included when figuring the selling price and the contract price. Printable 1040ez federal tax form Payments you receive on the note are used to figure your gain in the year received. Printable 1040ez federal tax form Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Printable 1040ez federal tax form This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Printable 1040ez federal tax form It does not apply to the following dispositions. Printable 1040ez federal tax form Sales of property used or produced in farming. Printable 1040ez federal tax form Sales of personal-use property. Printable 1040ez federal tax form Qualifying sales of time-shares and residential lots. Printable 1040ez federal tax form The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Printable 1040ez federal tax form The amount treated as a payment is considered received on the later of the following dates. Printable 1040ez federal tax form The date the debt becomes secured. Printable 1040ez federal tax form The date you receive the debt proceeds. Printable 1040ez federal tax form A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Printable 1040ez federal tax form For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Printable 1040ez federal tax form Limit. Printable 1040ez federal tax form   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Printable 1040ez federal tax form The total contract price on the installment sale. Printable 1040ez federal tax form Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Printable 1040ez federal tax form Installment payments. Printable 1040ez federal tax form   The pledge rule accelerates the reporting of the installment obligation payments. Printable 1040ez federal tax form Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Printable 1040ez federal tax form Exception. Printable 1040ez federal tax form   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Printable 1040ez federal tax form The debt was outstanding on December 17, 1987. Printable 1040ez federal tax form The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Printable 1040ez federal tax form   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Printable 1040ez federal tax form   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Printable 1040ez federal tax form Any excess is treated as a payment on the installment obligation. Printable 1040ez federal tax form Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Printable 1040ez federal tax form These sales cannot be reported on the installment method. Printable 1040ez federal tax form The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Printable 1040ez federal tax form When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sell property for $100,000. Printable 1040ez federal tax form The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Printable 1040ez federal tax form You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Printable 1040ez federal tax form You report the entire gain in the year of sale. Printable 1040ez federal tax form Escrow established in a later year. Printable 1040ez federal tax form   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Printable 1040ez federal tax form Substantial restriction. Printable 1040ez federal tax form   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Printable 1040ez federal tax form For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Printable 1040ez federal tax form Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Printable 1040ez federal tax form Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Printable 1040ez federal tax form Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Printable 1040ez federal tax form The recapture income is also included in Part I of Form 6252. Printable 1040ez federal tax form However, the gain equal to the recapture income is reported in full in the year of the sale. Printable 1040ez federal tax form Only the gain greater than the recapture income is reported on the installment method. Printable 1040ez federal tax form For more information on depreciation recapture, see chapter 3 in Publication 544. Printable 1040ez federal tax form The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Printable 1040ez federal tax form Determining gross profit is discussed under General Rules , earlier. Printable 1040ez federal tax form Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Printable 1040ez federal tax form If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Printable 1040ez federal tax form These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Printable 1040ez federal tax form Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Printable 1040ez federal tax form Instead, all payments to be received are considered received in the year of sale. Printable 1040ez federal tax form However, see Exception , below. Printable 1040ez federal tax form Depreciable property for this rule is any property the purchaser can depreciate. Printable 1040ez federal tax form Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Printable 1040ez federal tax form In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Printable 1040ez federal tax form The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Printable 1040ez federal tax form Exception. Printable 1040ez federal tax form   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Printable 1040ez federal tax form You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Printable 1040ez federal tax form Related person. Printable 1040ez federal tax form   Related persons include the following. Printable 1040ez federal tax form A person and all controlled entities with respect to that person. Printable 1040ez federal tax form A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Printable 1040ez federal tax form Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Printable 1040ez federal tax form Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Printable 1040ez federal tax form   For information about which entities are controlled entities, see section 1239(c). Printable 1040ez federal tax form Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Printable 1040ez federal tax form The related person makes the second disposition before making all payments on the first disposition. Printable 1040ez federal tax form The related person disposes of the property within 2 years of the first disposition. Printable 1040ez federal tax form This rule does not apply if the property involved is marketable securities. Printable 1040ez federal tax form Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Printable 1040ez federal tax form See Exception , later. Printable 1040ez federal tax form Related person. Printable 1040ez federal tax form   Related persons include the following. Printable 1040ez federal tax form Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Printable 1040ez federal tax form A partnership or estate and a partner or beneficiary. Printable 1040ez federal tax form A trust (other than a section 401(a) employees trust) and a beneficiary. Printable 1040ez federal tax form A trust and an owner of the trust. Printable 1040ez federal tax form Two corporations that are members of the same controlled group as defined in section 267(f). Printable 1040ez federal tax form The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Printable 1040ez federal tax form A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Printable 1040ez federal tax form An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Printable 1040ez federal tax form A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Printable 1040ez federal tax form The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Printable 1040ez federal tax form Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Printable 1040ez federal tax form An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Printable 1040ez federal tax form A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Printable 1040ez federal tax form An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Printable 1040ez federal tax form Example 1. Printable 1040ez federal tax form In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Printable 1040ez federal tax form His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Printable 1040ez federal tax form His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Printable 1040ez federal tax form He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Printable 1040ez federal tax form 50). Printable 1040ez federal tax form Bob made no improvements to the property and sold it to Alfalfa Inc. Printable 1040ez federal tax form , in 2013 for $600,000 after making the payment for that year. Printable 1040ez federal tax form The amount realized from the second disposition is $600,000. Printable 1040ez federal tax form Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Printable 1040ez federal tax form 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Printable 1040ez federal tax form Example 2. Printable 1040ez federal tax form Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Printable 1040ez federal tax form The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Printable 1040ez federal tax form 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Printable 1040ez federal tax form They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Printable 1040ez federal tax form In 2016, he receives the final $100,000 payment. Printable 1040ez federal tax form He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Printable 1040ez federal tax form 50 Installment sale income for 2016 $ 50,000 Exception. Printable 1040ez federal tax form   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Printable 1040ez federal tax form Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Printable 1040ez federal tax form   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Printable 1040ez federal tax form However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Printable 1040ez federal tax form   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Printable 1040ez federal tax form An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Printable 1040ez federal tax form A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Printable 1040ez federal tax form Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Printable 1040ez federal tax form These trades are known as like-kind exchanges. Printable 1040ez federal tax form The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Printable 1040ez federal tax form You do not have to report any part of your gain if you receive only like-kind property. Printable 1040ez federal tax form However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Printable 1040ez federal tax form For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Printable 1040ez federal tax form Installment payments. Printable 1040ez federal tax form   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Printable 1040ez federal tax form The contract price is reduced by the FMV of the like-kind property received in the trade. Printable 1040ez federal tax form The gross profit is reduced by any gain on the trade that can be postponed. Printable 1040ez federal tax form Like-kind property received in the trade is not considered payment on the installment obligation. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Printable 1040ez federal tax form He also receives an installment note for $800,000 in the trade. Printable 1040ez federal tax form Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Printable 1040ez federal tax form George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Printable 1040ez federal tax form His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Printable 1040ez federal tax form The contract price is $800,000 ($1,000,000 − $200,000). Printable 1040ez federal tax form The gross profit percentage is 75% ($600,000 ÷ $800,000). Printable 1040ez federal tax form He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Printable 1040ez federal tax form He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Printable 1040ez federal tax form Deferred exchanges. Printable 1040ez federal tax form   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Printable 1040ez federal tax form Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Printable 1040ez federal tax form If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Printable 1040ez federal tax form See Regulations section 1. Printable 1040ez federal tax form 1031(k)-1(j)(2) for these rules. Printable 1040ez federal tax form Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Printable 1040ez federal tax form This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Printable 1040ez federal tax form If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Printable 1040ez federal tax form For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Printable 1040ez federal tax form 453-1(c). Printable 1040ez federal tax form Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Printable 1040ez federal tax form You also have to allocate part of the selling price to each asset. Printable 1040ez federal tax form If you sell assets that constitute a trade or business, see Sale of a Business , later. Printable 1040ez federal tax form Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Printable 1040ez federal tax form If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Printable 1040ez federal tax form This becomes the net FMV. Printable 1040ez federal tax form A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Printable 1040ez federal tax form However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Printable 1040ez federal tax form It must be reported separately. Printable 1040ez federal tax form The remaining assets sold at a gain are reported together. Printable 1040ez federal tax form Example. Printable 1040ez federal tax form You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Printable 1040ez federal tax form The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Printable 1040ez federal tax form Your installment sale basis for each parcel was $15,000. Printable 1040ez federal tax form Your net gain was $85,000 ($130,000 − $45,000). Printable 1040ez federal tax form You report the gain on the installment method. Printable 1040ez federal tax form The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Printable 1040ez federal tax form The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Printable 1040ez federal tax form The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Printable 1040ez federal tax form You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Printable 1040ez federal tax form Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Printable 1040ez federal tax form You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Printable 1040ez federal tax form The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Printable 1040ez federal tax form You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Printable 1040ez federal tax form However, if parcel C was held for personal use, the loss is not deductible. Printable 1040ez federal tax form You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Printable 1040ez federal tax form Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Printable 1040ez federal tax form Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Printable 1040ez federal tax form Assets sold at a loss. Printable 1040ez federal tax form Real and personal property eligible for the installment method. Printable 1040ez federal tax form Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Printable 1040ez federal tax form Inventory. Printable 1040ez federal tax form   The sale of inventories of personal property cannot be reported on the installment method. Printable 1040ez federal tax form All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Printable 1040ez federal tax form   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Printable 1040ez federal tax form If you do not, each payment must be allocated between the inventory and the other assets sold. Printable 1040ez federal tax form   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Printable 1040ez federal tax form Use your basis in the inventory to figure the cost of goods sold. Printable 1040ez federal tax form Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Printable 1040ez federal tax form Residual method. Printable 1040ez federal tax form   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Printable 1040ez federal tax form This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Printable 1040ez federal tax form   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Printable 1040ez federal tax form This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Printable 1040ez federal tax form   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Printable 1040ez federal tax form   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Printable 1040ez federal tax form The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Printable 1040ez federal tax form   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Printable 1040ez federal tax form Certificates of deposit, U. Printable 1040ez federal tax form S. Printable 1040ez federal tax form Government securities, foreign currency, and actively traded personal property, including stock and securities. Printable 1040ez federal tax form Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Printable 1040ez federal tax form However, see Regulations section 1. Printable 1040ez federal tax form 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Printable 1040ez federal tax form Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Printable 1040ez federal tax form All other assets except section 197 intangibles. Printable 1040ez federal tax form Section 197 intangibles except goodwill and going concern value. Printable 1040ez federal tax form Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Printable 1040ez federal tax form   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Printable 1040ez federal tax form For example, if an asset is described in both (4) and (6), include it in (4). Printable 1040ez federal tax form Agreement. Printable 1040ez federal tax form   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Printable 1040ez federal tax form This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Printable 1040ez federal tax form Reporting requirement. Printable 1040ez federal tax form   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Printable 1040ez federal tax form Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Printable 1040ez federal tax form The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Printable 1040ez federal tax form Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Printable 1040ez federal tax form The sale of a partnership interest is treated as the sale of a single capital asset. Printable 1040ez federal tax form The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Printable 1040ez federal tax form (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Printable 1040ez federal tax form ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Printable 1040ez federal tax form The gain allocated to the other assets can be reported under the installment method. Printable 1040ez federal tax form For more information on the treatment of unrealized receivables and inventory, see Publication 541. Printable 1040ez federal tax form Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Printable 1040ez federal tax form You received a $100,000 down payment and the buyer's note for $120,000. Printable 1040ez federal tax form The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Printable 1040ez federal tax form The total selling price is $220,000. Printable 1040ez federal tax form Your selling expenses are $11,000. Printable 1040ez federal tax form The selling expenses are divided among all the assets sold, including inventory. Printable 1040ez federal tax form Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Printable 1040ez federal tax form The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Printable 1040ez federal tax form Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Printable 1040ez federal tax form The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Printable 1040ez federal tax form The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Printable 1040ez federal tax form   Sale  Price Sale   Exp. Printable 1040ez federal tax form Adj. Printable 1040ez federal tax form   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Printable 1040ez federal tax form A 71,000 3,550 63,800 3,650 Mch. Printable 1040ez federal tax form B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Printable 1040ez federal tax form There is no depreciation recapture income because the building was depreciated using the straight line method. Printable 1040ez federal tax form All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Printable 1040ez federal tax form Figure depreciation recapture in Part III of Form 4797. Printable 1040ez federal tax form The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Printable 1040ez federal tax form This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Printable 1040ez federal tax form These gains are reported in full in the year of sale and are not included in the installment sale computation. Printable 1040ez federal tax form Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Printable 1040ez federal tax form The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Printable 1040ez federal tax form The selling price equals the contract price for the installment sale ($108,500). Printable 1040ez federal tax form The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Printable 1040ez federal tax form   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Printable 1040ez federal tax form The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Printable 1040ez federal tax form 95 Building— $9,600 ÷ $108,500 8. Printable 1040ez federal tax form 85 Goodwill— $17,575 ÷ $108,500 16. Printable 1040ez federal tax form 20 Total 48. Printable 1040ez federal tax form 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Printable 1040ez federal tax form The selling price for the installment sale is $108,500. Printable 1040ez federal tax form This is 49. Printable 1040ez federal tax form 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Printable 1040ez federal tax form The selling price of assets not reported on the installment method is $111,500. Printable 1040ez federal tax form This is 50. Printable 1040ez federal tax form 7% ($111,500 ÷ $220,000) of the total selling price. Printable 1040ez federal tax form Multiply principal payments by 49. Printable 1040ez federal tax form 3% to determine the part of the payment for the installment sale. Printable 1040ez federal tax form The balance, 50. Printable 1040ez federal tax form 7%, is for the part reported in the year of the sale. Printable 1040ez federal tax form The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Printable 1040ez federal tax form When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Printable 1040ez federal tax form Only the part for the installment sale (49. Printable 1040ez federal tax form 3%) is used in the installment sale computation. Printable 1040ez federal tax form The only payment received in 2013 is the down payment of $100,000. Printable 1040ez federal tax form The part of the payment for the installment sale is $49,300 ($100,000 × 49. Printable 1040ez federal tax form 3%). Printable 1040ez federal tax form This amount is used in the installment sale computation. Printable 1040ez federal tax form Installment income for 2013. Printable 1040ez federal tax form   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Printable 1040ez federal tax form Income Land—22. Printable 1040ez federal tax form 95% of $49,300 $11,314 Building—8. Printable 1040ez federal tax form 85% of $49,300 4,363 Goodwill—16. Printable 1040ez federal tax form 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Printable 1040ez federal tax form   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Printable 1040ez federal tax form 3% of the total payments you receive on the buyer's note during the year. Printable 1040ez federal tax form Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Printable 1040ez federal tax form Interest provided in the contract is called stated interest. Printable 1040ez federal tax form If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Printable 1040ez federal tax form If section 483 applies to the contract, this interest is called unstated interest. Printable 1040ez federal tax form If section 1274 applies to the contract, this interest is called original issue discount (OID). Printable 1040ez federal tax form An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Printable 1040ez federal tax form Treatment of unstated interest and OID. Printable 1040ez federal tax form   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Printable 1040ez federal tax form As a result, the buyer cannot deduct the unstated interest. Printable 1040ez federal tax form The seller must report the unstated interest as income. Printable 1040ez federal tax form   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Printable 1040ez federal tax form   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Printable 1040ez federal tax form Rules for the seller. Printable 1040ez federal tax form   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Printable 1040ez federal tax form If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Printable 1040ez federal tax form   Include the unstated interest in income based on your regular method of accounting. Printable 1040ez federal tax form Include OID in income over the term of the contract. Printable 1040ez federal tax form   The OID includible in income each year is based on the constant yield method described in section 1272. Printable 1040ez federal tax form (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Printable 1040ez federal tax form )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Printable 1040ez federal tax form Reduce the selling price by any stated principal treated as interest to determine the gain. Printable 1040ez federal tax form   Report unstated interest or OID on your tax return, in addition to stated interest. Printable 1040ez federal tax form Rules for the buyer. Printable 1040ez federal tax form   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Printable 1040ez federal tax form These rules do not apply to personal-use property (for example, property not used in a trade or business). Printable 1040ez federal tax form Adequate stated interest. Printable 1040ez federal tax form   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Printable 1040ez federal tax form The present value of a payment is determined based on the test rate of interest, defined next. Printable 1040ez federal tax form (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Printable 1040ez federal tax form ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Printable 1040ez federal tax form Test rate of interest. Printable 1040ez federal tax form   The test rate of interest for a contract is the 3-month rate. Printable 1040ez federal tax form The 3-month rate is the lower of the following applicable federal rates (AFRs). Printable 1040ez federal tax form The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Printable 1040ez federal tax form The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Printable 1040ez federal tax form Applicable federal rate (AFR). Printable 1040ez federal tax form   The AFR depends on the month the binding